SFI Taking 2009 to the Bank

by REIT Wrecks on July 31, 2008

Where did THAT banana come from?

IStar announced earnings today, along with an estimated 50% cut in the dividend. The cut was signaled pretty clearly in a pre-announcement on July 18th.

IStar set aside $217 million noncash for bad loans, which thankfully was much less that the high end of the $275 range they estimated on July 18th (and that, in addition to a new $50 million stock repurchase program with whose money? they announced, is probably why the stock is up today), and recorded a $45 million charge for mark-to-market impairments, which was also less than the $50 million forecast two weeks ago. Thus, the silver lining, if there is one, is that there may be a floor on their new dividend estimate of .30 to .40 cents a share. Nevertheless, there was a lot of equivocation on the exact amount of the dividend going forward.

However, the bigger problem is that none of the “many moving pieces” have been moving in the right direction. IStar frequently boasts about its ability and infrastructure to work out impaired assets (what else would they say, given that they are busy taking Fremont dirt back by the truck load?), but obviously their recoveries have not been living up to their original portfolio assumptions.

The “higher beta around asset recovery” (a euphemism for having guessed wrong on the first place) relates to two things that may get even worse in the current environment. The first is the length of time it’s been taking to effect the workouts. It is simply taking them much longer than they thought wait,.. weren’t they the experts?? to stabilize and sell the assets. Given that the era of indiscriminate capital – which had been bailing out a lot of borrowers and owners – is now over, this is not likely to get much better.

The second issue is related to the first and that is their reliance on “recourse” provisions is turning out to be not so reliable. Recourse allows a lender like IStar to go after other assets of the borrower in an event of default. In this environment, however, any unencumbered assets that may be available to satisfy those provisions are quickly becoming the object of a massive lender scrum, with Istar just one among the hungry crowd. Consequently, they have not been providing the safety net that was originally you mean they were wrong?? thought.

To be fair, this is now all history and most of the reason why the stock went into the toilet back on July 18th. What about the prospects going forward? IStar says they have “scrubbed” their portolio (of what, pesky fleas or the dogs that carry them?) well into to 2009 and that they are now more confident of their estimates – yet again – even after having stressed their loan book with a hypothetical 50% reduction in the amount of scheduled 2009 repayments. They also say they will not need to raise any new debt or equity capital through 2009.

Nevertheless, this is now a show-me REIT. IStar has a lot more “dead money” in it’s portfolio than they previously forecast, and they are now very, very close to breaching their bond covenants. If any additional fleas do turn up in the Fremont deal, and in this environment you should assume the worst, IStar will need to pay a visit to the rating agency wood shed.

Significantly, in the conference call, Sugarman several times referred to the need for the ratings agencies to be “fair” in their future evaluations of IStar. In this environment, that is not something I would want to depend upon if I were a shareholder.

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